Ask The Attorney

When Does a Lie About a Boat Offered for Sale Constitute Fraud?

I am in the process of purchasing a boat through a yacht broker. According to the advertisement, the boat had been run for around 100 hours since the engines were completely rebuilt. During my engine survey, however, my mechanic determined that the engines had never been rebuilt. I worked with the seller and the broker on this problem for a while. But several days before the deal was scheduled to close, I decided that I did not want to buy a boat that had been fraudulently misrepresented in this manner, so I backed out of the purchase. My broker now advises me that I will lose my deposit, since I had already signed the “final acceptance” line on the purchase contract. This seems ridiculous, in light of the misrepresentations about the engines, and I am considering legal action against the broker and the seller for fraud. What are my options in a case like this?
Our reader is considering legal action for fraud — but he must also deal with the possibility of legal action against him for breach of contract, as a consequence of backing out of the purchase. Let’s look at each of these issues separately.

The boat was represented as having recently rebuilt engines, but this apparently was not the case. The representations may have been intentional, in which case our reader may have a cause of action for fraud, or they may have been made without any specific knowledge, which may still give rise to a legal action for negligent misrepresentation.

According to section 3294(c) of the California Civil Code, “fraud” is defined as “an intentional misrepresentation, deceit or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.”

Notably, a legal claim for misrepresentation also requires that a person suffer “actual damages” in order to recover from a defendant. Furthermore, the damage must have been suffered as a consequence of the buyer’s reasonable reliance upon the lie or misrepresentation. In other words, there is a difference between a lie and a fraud. A lie that does not result in financial damage is not a fraud. And a lie that may not be reasonably relied upon is not a fraud.

Our reader learned of the incorrect statement regarding the engines prior to the time that he committed to the purchase of the boat. This means that he had an opportunity to reject the boat, but he instead chose to negotiate a better deal and go forward with the purchase. Since he knew about the true condition of the engines prior to committing to a purchase, it will be difficult for him to establish that he relied upon the false statement in reaching his decision. Similarly, he will have a hard time proving that he suffered any damages, since he never actually bought the boat.

So, it appears that our reader will not be able to establish a claim for misrepresentation. This brings us to the question of whether he breached his purchase contract by backing out of the deal after he signed the final acceptance provision.

Boat purchases in California may be executed on a wide variety of contracts, and the question of whether a contract was breached will depend in large part on the language of the document. Most yacht purchases, however, use the form contracts prepared by the California Yacht Brokers Association, so we will assume that our reader’s transaction used a CYBA purchase contract.

The “final acceptance” section of the CYBA purchase contract allows a buyer to inspect the boat, secure financing and satisfy other contingencies prior to making a final decision to proceed with the purchase. Generally speaking, buyers may back out of the purchase until they sign the final acceptance, but they are obligated to go forward when they sign it.

Our reader may, therefore, be found to have breached the contract unless he is excused for some reason. A party may be excused from performing under a contract if the agreement was already breached by another party, or if some other legal claim arises against another party.

In this case, our reader may be excused from the contract if he can establish that the seller is liable for fraud — but, as we discussed above, he is unlikely to succeed in that claim. As such, he will probably be found to have breached the purchase contract if he fails to go through with the purchase — and, if so, he will probably lose his deposit.

We always include a disclaimer at the end of this column, advising that every legal dispute is different and that you should seek specific legal advice before reaching a conclusion on your particular case. This is especially true with today’s discussion. Talk to an attorney experienced with purchase and sale transactions in your state, if you are considering legal action of your own.

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